Why Is It So Important To Understand The Finances Of Your Business?

It would seem to be an obvious statement to say that businesses should understand their finances; truly, a business is its finances, its profit and loss, income and outgoings. Yet so many businesses fail to pay attention to finances until it’s too late. Poor financial planning can lead to businesses that outwardly seem to be doing well maxing out, all because they haven’t given proper consideration to topics like cash flow, planning for taxes, and budgeting for expansion. Productivity, hard work, and marketing should be a given, but understanding finances could be the difference between a successful business and one that goes under before its time.

Why do Businesses Ignore Finance?

Finances are complicated and boring. That’s why accountants exist. Businesses hire accountants to take care of finances for them, so that they can get on with the important matters of buying and selling, allocating resources, and doing the work. When someone goes into business they are capitalizing on their skills, aptitude and knowledge, and accountancy isn’t necessarily one of them. It’s understandable then that the finer points of business finances often get neglected. But this can prove a fatal error.

If a business can afford it, it’s a good idea to hire an outside accountant to handle finances. A business may also want to train an existing employee to take on this role. That doesn’t mean that business owners can then afford to be ignorant of their financial situation until the accountant tells them that there’s a problem. Basic financial analysis can be the key to business decisions that are the responsibility of the owners or company directors. For this reason having a basic understanding of the field, perhaps by earning an associate degree in accounting can be beneficial.

Be Prepared

Obviously businesses have a legal requirement to keep records. They also need to manage their finances so they don’t over-extend themselves, and have enough available liquidity to meet basic operating costs like rent, utilities, phone, insurance, payroll and supplies. It’s also important to expect the unexpected. A business can be doing well when an unrelated, general shift in the economy causes a financial downturn. Another unforeseen, but all-too common expense is a legal challenge or lawsuit. Even if it is unjustified, it may require an out-of-court settlement. Having professional liability insurance can partly protect against this.

Businesses also need to keep on top of amounts they are likely to owe in taxes, and to manage their tax burden. For instance, it might be worth postponing a major asset purchase till the next year in order to claim it against that year’s taxes.

Basic financial analysis allows businesses to understand how they’re really performing in the long-term, by making comparisons against targets, forecasts, previous years and industry averages. This allows for the planning necessary for future growth and survival. Finance may seem like an obscure art, but it’s an area where no business can afford to be ignorant.

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